Macatawa Bank Corporation

The company reported a fourth quarter net interest margin of 2.74%, down 24 basis points from the prior quarter. It took a $26 million goodwill impairment charge and wrote off $1.7 million of other acquisition intangibles, for a total $27.7 million write-off, leaving $875,000 of core deposit intangible assets remaining. The allowance for loan losses increased by nearly $8 million to 2.16% from 1.73% at September 30, 2008. Non-performing assets rose to $112 million, or 5.21% of assets, while total delinquencies ended the year at 6.17%. Management did not give formal revenue or EPS guidance on the call. Looking ahead, it said the full $6 million annualized benefit from 2008 cost-savings initiatives should be realized in 2009, core deposits were up slightly for the year, and January residential mortgage originations/loans in process were over $70 million. The team also said it expects to close on over $5 million of OREO in the next 30 to 45 days.

Phil Koning said the bank had gone through one of its most difficult years and framed the $31.4 million preferred stock raise as a key source of confidence and support. His tone was guarded but constructive: he stressed capital preservation, liquidity, and operating improvement, and said the bank believes it has a “great franchise” and a future in West Michigan despite a weak local economy. He also pointed to ongoing deposit growth, though at a slower pace, and highlighted diversification in the regional economy as a reason for optimism.

Jon Swets focused on the drivers of margin compression, saying the 24-basis-point sequential decline in net interest margin was driven mainly by non-performing assets, interest reversals, a negative funding mix shift toward wholesale funding, competitive deposit pricing, and a 3-basis-point drag from the FHLB Indianapolis dividend suspension. He also emphasized that core non-interest expense fell by about $700,000 sequentially and said cost-saving initiatives put in place during 2008 have an annualized $6 million impact, with about half recognized in 2008 and the full amount expected in 2009. On credit, he noted the allowance for loan losses increased nearly $8 million to 2.16% because of higher non-performing loans, delinquencies, and specific credit reserves, while consumer and residential mortgage charge-offs remained very low in 2008.

In Q&A, analysts asked about the litigation settlement with trade partners, and management said it is basically settled but still subject to court approval and plaintiff sign-on requirements; they said the timing and quarter of expense recognition remained uncertain. Questions also focused on the increase in other real estate owned (OREO), and management explained that much of it came from properties moving through foreclosure and, in some cases, land rather than a large home inventory. They said they expect to close on over $5 million of OREO in the next 30 to 45 days and reiterated that real estate marketing had been fairly successful so far.